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,
	2018			2017
Balance at beginning of period	$	84,269		$	80,239
Origination of servicing assets		12,248			11,630
Change in fair value:
Due to market changes		13,879			(2,218	)
Due to run-off		(9,022	)		(8,174	)
Balance at end of period	$	101,374		$	81,477

Trustmark determines the fair value of the MSR using a valuation model administered by a third party that calculates the present value of estimated future net servicing income. 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, 2018, the fair value of the MSR included an assumed average prepayment speed of 6.86 CPR and an average discount rate of 10.04% compared to an assumed average prepayment speed of 9.25 CPR and an average discount rate of 10.28% at September 30, 2017.

Mortgage Loans Serviced/Sold

During the first nine months of 2018 and 2017, Trustmark sold $820.6 million and $871.9 million, respectively, of residential mortgage loans. Pretax gains on these sales were recorded to noninterest income in mortgage banking, net and totaled $16.4 million for the first nine months of 2018 compared to $13.6 million for the first nine months of 2017. The table below details the mortgage loans sold and serviced for others at September 30, 2018 and December 31, 2017 ($ in thousands):

	September 30, 2018		December 31, 2017
Federal National Mortgage Association	$	4,174,961	$	4,128,614
Government National Mortgage Association		2,492,009		2,421,456
Federal Home Loan Mortgage Corporation		69,617		47,071
Other		22,804		26,864
Total mortgage loans sold and serviced for others	$	6,759,391	$	6,624,005

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 are 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):

	Nine Months Ended September 30,
	2018		2017
Balance at beginning of period	$	1,000	$	1,130
Provision for putback expenses		—		164
Other (1)		—		706
Balance at end of period	$	1,000	$	2,000

(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.