Loan Sales And Securitizations

6 Months Ended

Jun. 30, 2011

Loan Sales And Securitizations

Loan Sales And Securitizations

Note 13 — Loan Sales and Securitizations

Prior to 2009, FHN utilized loan sales and securitizations as a significant source of liquidity for its mortgage banking operations. Since that time FHN has focused the originations of mortgages within its regional banking footprint. FHN no longer retains financial interests in loans it transfers to third parties. During second quarter 2011, FHN transferred $54.4 million of single-family residential mortgage loans in whole loan sales resulting in $.3 million of net pre-tax gains. During second quarter 2010, FHN transferred $178.9 million of single-family residential mortgage loans in whole loan sales resulting in $1.5 million of net pre-tax gains. During the six months ended June 30, 2011, FHN transferred $192.6 million of single-family residential mortgage loans in whole loan sales resulting in $1.2 million of net pre-tax gains. During the six months ended June 30, 2010, FHN transferred $353.8 million of single-family residential mortgage loans in whole loan sales resulting in $3.0 million of net pre-tax gains.

Retained Interests

Interests retained from prior loan sales, including GSE securitizations, typically included MSR and excess interest. Interests retained from proprietary securitizations included MSR and various financial assets (see discussion below). MSR were initially valued at fair value and the remaining retained interests were initially valued by allocating the remaining cost basis of the loan between the security or loan sold and the remaining retained interests based on their relative fair values at the time of sale or securitization.

In certain cases, FHN continues to service and receive servicing fees related to the transferred loans. In second quarter 2011 and 2010, FHN received annual servicing fees approximating .29 percent of the outstanding balance of underlying single-family residential mortgage loans and .34 percent inclusive of income related to excess interest. In second quarter 2011 and 2010, FHN received annual servicing fees approximating .50 percent of the outstanding balance of underlying loans for HELOC and home equity loans transferred. MSR related to loans transferred and serviced by FHN, as well as MSR related to loans serviced by FHN and transferred by others, are discussed further in Note 5 — Mortgage Servicing Rights. There were no additions to MSR in 2011 or 2010.

Other financial assets retained in proprietary or GSE securitizations may include excess interest (structured as interest-only strips), interest-only strips, or principal-only strips. Excess interest represents rights to receive interest from serviced assets that exceed contractually specified rates. Principal-only strips are principal cash flow tranches and interest-only strips are interest cash flow tranches. All financial assets retained from off balance sheet securitizations are recognized on the Consolidated Condensed Statements of Condition in trading securities at fair value with realized and unrealized gains and losses included in current earnings as a component of Mortgage banking noninterest income on the Consolidated Condensed Statements of Income.

The sensitivity of the fair value of all retained or purchased MSR to immediate 10 percent and 20 percent adverse changes in assumptions on June 30, 2011 and 2010, are as follows:

	June 30, 2011									June 30, 2010
(Dollars in thousands	First			Second						First			Second
except for annual cost to service)	Liens			Liens			HELOC			Liens			Liens			HELOC
Fair value of retained interests	$	183,530		$	251		$	3,177		$	197,953		$	242		$	3,551
Weighted average life (in years)		4.3			2.9			2.6			3.7			2.3			2.5
Annual prepayment rate		20.0	%		26.0	%		29.4	%		22.6	%		33.0	%		31.6	%
Impact on fair value of 10% adverse change	$	(9,109	)	$	(16	)	$	(229	)	$	(11,766	)	$	(24	)	$	(446	)
Impact on fair value of 20% adverse change		(17,448	)		(31	)		(439	)		(22,425	)		(47	)		(854	)
Annual discount rate on servicing cash flows		11.6	%		14.0	%		18.0	%		11.8	%		14.0	%		18.0	%
Impact on fair value of 10% adverse change	$	(5,304	)	$	(7	)	$	(96	)	$	(5,189	)	$	(7	)	$	(173	)
Impact on fair value of 20% adverse change		(10,273	)		(14	)		(187	)		(10,071	)		(13	)		(336	)
Annual cost to service (per loan)	$	118		$	50		$	50		$	115		$	50		$	50
Impact on fair value of 10% adverse change		(3,830	)		(6	)		(51	)		(4,975	)		(5	)		(113	)
Impact on fair value of 20% adverse change		(7,633	)		(11	)		(101	)		(9,922	)		(10	)		(226	)
Annual earnings on escrow		1.4	%		—			—			2.0	%		—			—
Impact on fair value of 10% adverse change	$	(1,727	)		—			—		$	(2,484	)		—			—
Impact on fair value of 20% adverse change		(3,454	)		—			—			(4,968	)		—			—

The sensitivity of the fair value of other retained interests to immediate 10 percent and 20 percent adverse changes in assumptions on June 30, 2011 and 2010, are as follows:

	Excess
(Dollars in thousands	Interest			Certificated
except for annual cost to service)	IO			PO
June 30, 2011
Fair value of retained interests	$	22,643		$	8,775
Weighted average life (in years)		4.5			4.9
Annual prepayment rate		17.1	%		25.6	%
Impact on fair value of 10% adverse change	$	(978	)	$	(303	)
Impact on fair value of 20% adverse change		(1,893	)		(594	)
Annual discount rate on residual cash flows		13.1	%		18.7	%
Impact on fair value of 10% adverse change	$	(926	)	$	(439	)
Impact on fair value of 20% adverse change		(1,773	)		(872	)
June 30, 2010
Fair value of retained interests	$	28,611		$	11,340
Weighted average life (in years)		3.7			4.6
Annual prepayment rate		20.7	%		25.4	%
Impact on fair value of 10% adverse change	$	(1,493	)	$	(336	)
Impact on fair value of 20% adverse change		(2,875	)		(668	)
Annual discount rate on residual cash flows		13.6	%		21.3	%
Impact on fair value of 10% adverse change	$	(1,101	)	$	(449	)
Impact on fair value of 20% adverse change		(2,113	)		(900	)

These sensitivities are hypothetical and should not be considered predictive of future performance. As the figures indicate, changes in fair value based on a 10 percent variation in assumptions cannot necessarily be extrapolated because the relationship between the change in assumption and the change in fair value may not be linear. Also, the effect on the fair value of the retained interest caused by a particular assumption variation is calculated independently from all other assumption changes. In reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. Furthermore, the estimated fair values, as disclosed, should not be considered indicative of future earnings on these assets.

For the three and six months ended June 30, 2011 and 2010, cash flows received and paid related to loan sales and securitizations were as follows:

	Three Months Ended				Six Months Ended
	June 30				June 30
(Dollars in thousands)	2011		2010		2011		2010
Proceeds from initial sales and securitizations	$	54,621	$	180,430	$	193,823	$	356,766
Servicing fees retained (a)		19,843		27,074		41,335		55,890
Purchases of GNMA guaranteed mortgages		15,704		18,462		37,911		36,606
Purchases of previously transferred financial assets (b) (c)		88,444		66,314		141,636		187,405
Other cash flows received on retained interests		1,859		2,412		4,062		4,983

Certain previously reported amounts have been reclassified to agree with current presentation.

(a)	Includes servicing fees on MSR associated with loan sales and purchased MSR.
(b)	Includes repurchases of both delinquent and performing loans, foreclosed assets, and make-whole payments for economic losses incurred by purchaser. Also includes buyouts from GSEs in order to facilitate foreclosures.
(c)	2011 includes $32.7 million related to clean-up calls exercised by FHN in second quarter.

  

The principal amount of loans transferred through loan sales and securitizations and other loans managed with them, the principal amount of delinquent loans, and the net credit losses during the three and six months ended June 30, 2011, are as follows:

	Total Principal			Principal Amount		Net Credit
(Dollars in thousands)	Amount of Loans			of Delinquent Loans (a)		Losses (b)
						Three Months Ended		Six Months Ended
	On June 30, 2011					June 30, 2011		June 30, 2011
Type of loan:
Real estate residential	$	19,703,040		$	926,851	$	127,649	$	255,998
Total loans managed or transferred (c)	$	19,703,040		$	926,851	$	127,649	$	255,998
Loans sold		(12,291,777	)
Loans held for sale		(318,888	)
Loans held in portfolio	$	7,092,375

(a)	Loans 90 days or more past due include $39.9 million of GNMA guaranteed mortgages.
(b)	Principal amount of loans securitized and sold includes $8.9 billion of loans securitized through GNMA, FNMA, or FHLMC. FHN retains interests other than servicing rights on a portion of these securitized loans. No delinquency or net credit loss data is included for the loans securitized through FNMA or FHMLC because these agencies retain credit risk. The remainder of loans securitized and sold were securitized through proprietary trusts, where FHN retained interests other than servicing rights. See Note 9 — Contingencies and Other Disclosures for discussion related to repurchase obligations for loans transferred to GSEs and private investors.
(c)	Amount represents real estate residential loans transferred in proprietary securitizations and whole loan sales in which FHN has a retained interest other than servicing rights. For loans transferred to GSEs, includes all loans with retained interests.

The principal amount of loans transferred through loan sales and securitizations and other loans managed with them, the principal amount of delinquent loans, and the net credit losses during the three and six months ended June 30, 2010, are as follows:

	Total Principal			Principal Amount		Net Credit
(Dollars in thousands)	Amount of Loans			of Delinquent Loans (a)		Losses (b)
						Three months ended		Six months ended
	On June 30, 2010					June 30, 2010		June 30, 2010
Type of loan:
Real estate residential	$	24,237,368		$	1,011,894	$	151,686	$	294,607
Total loans managed or transferred (c)	$	24,237,368		$	1,011,894	$	151,686	$	294,607
Loans sold		(16,110,053	)
Loans held for sale		(339,062	)
Loans held in portfolio	$	7,788,253

(a)	Loans 90 days or more past due include $35.8 million of GNMA guaranteed mortgages.
(b)	Principal amount of loans securitized and sold includes $11.7 billion of loans securitized through GNMA, FNMA, or FHLMC. FHN retains interests other than servicing rights on a portion of these securitized loans. No delinquency or net credit loss data is included for the loans securitized through FNMA or FHMLC because these agencies retain credit risk. The remainder of loans securitized and sold were securitized through proprietary trusts, where FHN retained interests other than servicing rights. See Note 9 — Contingencies and Other Disclosures for discussion related to repurchase obligations for loans transferred to GSEs and private investors.
(c)	Amount represents real estate residential loans transferred in proprietary securitizations and whole loan sales in which FHN has a retained interest other than servicing rights. For loans transferred to GSEs, includes all loans with retained interests.

 

Secured Borrowings. FTBNA executed several securitizations of retail real estate residential loans for the purpose of engaging in secondary market financing. Since the related trusts did not qualify as Qualified Special Purpose Entities ("QSPE") under the applicable accounting rules at that time and since the cash flows on the loans are pledged to the holders of the trusts' securities, FTBNA recognized the proceeds as secured borrowings in accordance with Accounting Standards Codification 860-10-50, "Transfers and Servicing" ("ASC 860-10-50"). With the prospective adoption of ASU 2009-17 in first quarter 2010, all amounts related to consolidated proprietary securitization trusts have been included in restricted balances on the Consolidated Condensed Statements of Condition.

In 2007, FTBNA executed a securitization of certain small issuer trust preferreds for which the underlying trust did not qualify as a sale under ASC 860. Therefore, FTNBA has accounted for the funds received through the securitization as a secured borrowing. On June 30, 2011, FTBNA had $112.5 million of loans, net of unearned income, $1.7 million of trading securities, and $51.8 million of term borrowings on the Consolidated Condensed Statements of Condition related to this transaction. On June 30, 2010, FTBNA had $112.5 million of loans, net of unearned income, $1.7 million of trading securities, and $50.7 million of term borrowings on the Consolidated Condensed Statements of Condition related to this transaction. See Note 14 — Variable Interest Entities for additional information.