XML 203 R19.htm IDEA: XBRL DOCUMENT v2.4.0.8
Transfers of financial assets and mortgage servicing assets
 9 Months Ended
Sep. 30, 2013
Transfers and Servicing of Financial Assets [Abstract]  
Transfers And Servicing Of Financial Assets [Text Block]

Note 11 – Transfers of financial assets and mortgage servicing assets

 

The Corporation typically transfers conforming residential mortgage loans in conjunction with GNMA, FNMA and FHLMC securitization transactions whereby the loans are exchanged for cash or securities and servicing rights. The securities issued through these transactions are guaranteed by the corresponding agency and, as such, under seller/service agreements the Corporation is required to service the loans in accordance with the agencies' servicing guidelines and standards. Substantially all mortgage loans securitized by the Corporation in GNMA, FNMA and FHLMC securities have fixed rates and represent conforming loans. As seller, the Corporation has made certain representations and warranties with respect to the originally transferred loans and, in some instances, has sold loans with credit recourse to a government-sponsored entity, namely FNMA. Refer to Note 20 to the consolidated financial statements for a description of such arrangements.

No liabilities were incurred as a result of these securitizations during the quarters and nine months ended September 30, 2013 and 2012 because they did not contain any credit recourse arrangements. During the quarter ended September 30, 2013, the Corporation recorded a net gain $6.5 million (September 30, 2012 - $18.0 million) related to the residential mortgage loans securitized. During the nine months ended September 30, 2013, the Corporation recorded a net gain $33.0 million (September 30, 2012 - $45.6 million) related to the residential mortgage loans securitized.

The following tables present the initial fair value of the assets obtained as proceeds from residential mortgage loans securitized during the quarters and nine months ended September 30, 2013 and 2012:

  Proceeds Obtained During the Quarter Ended September 30, 2013
(In thousands)Level 1Level 2Level 3Initial Fair Value
Assets        
Trading account securities:        
Mortgage-backed securities - GNMA$ -$ 199,824$ -$ 199,824
Mortgage-backed securities - FNMA  -  101,922  -  101,922
Mortgage-backed securities - FHLMC  -  1,127  -  1,127
Total trading account securities$ -$ 302,873$ -$ 302,873
Mortgage servicing rights  -  -  4,466  4,466
Total $ -$ 302,873$ 4,466$ 307,339

  Proceeds Obtained During the Nine Months Ended September 30, 2013
(In thousands)Level 1Level 2Level 3Initial Fair Value
Assets        
Trading account securities:        
Mortgage-backed securities - GNMA$ -$ 767,393$ -$ 767,393
Mortgage-backed securities - FNMA  -  353,987  -  353,987
Mortgage-backed securities - FHLMC  -  27,819  -  27,819
Total trading account securities$ -$ 1,149,199$ -$ 1,149,199
Mortgage servicing rights  -  -  13,846  13,846
Total $ -$ 1,149,199$ 13,846$ 1,163,045

  Proceeds Obtained During the Quarter Ended September 30, 2012
(In thousands)Level 1Level 2Level 3Initial Fair Value
Assets        
Trading account securities:        
Mortgage-backed securities - GNMA$ -$ 180,827$ -$ 180,827
Mortgage-backed securities - FNMA  -  107,301  -  107,301
Mortgage-backed securities - FHLMC  -  20,425  -  20,425
Total trading account securities$ -$ 308,553$ -$ 308,553
Mortgage servicing rights  -  -  3,777  3,777
Total $ -$ 308,553$ 3,777$ 312,330

  Proceeds Obtained During the Nine Months Ended September 30, 2012
(In thousands)Level 1Level 2Level 3Initial Fair Value
Assets        
Trading account securities:        
Mortgage-backed securities - GNMA$ -$ 575,642$ -$ 575,642
Mortgage-backed securities - FNMA  -  238,285  -  238,285
Mortgage-backed securities - FHLMC  -  20,425  -  20,425
Total trading account securities$ -$ 834,352$ -$ 834,352
Mortgage servicing rights  -  -  10,798  10,798
Total $ -$ 834,352$ 10,798$ 845,150

During the nine months ended September 30, 2013, the Corporation retained servicing rights on whole loan sales involving approximately $116 million in principal balance outstanding (September 30, 2012 - $196 million), with realized gains of approximately $4.0 million (September 30, 2012 - gains of $8.9 million). All loan sales performed during the nine months ended September 30, 2013 and 2012 were without credit recourse agreements.

The Corporation recognizes as assets the rights to service loans for others, whether these rights are purchased or result from asset transfers such as sales and securitizations. These mortgage servicing rights (“MSRs”) are measured at fair value.

The Corporation uses a discounted cash flow model to estimate the fair value of MSRs. The discounted cash flow model incorporates assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, prepayment and late fees, among other considerations. Prepayment speeds are adjusted for the Corporation's loan characteristics and portfolio behavior.

The following table presents the changes in MSRs measured using the fair value method for the nine months ended September 30, 2013 and 2012.

Residential MSRs
(In thousands)September 30, 2013September 30, 2012
Fair value at beginning of period$ 154,430$ 151,323
Purchases  45  1,620
Servicing from securitizations or asset transfers  15,062  12,842
Sale of servicing assets  -  (103)
Changes due to payments on loans[1]  (17,351)  (14,262)
Reduction due to loan repurchases  (2,866)  (3,961)
Changes in fair value due to changes in valuation model inputs or assumptions  13,355  11,006
Other disposals  (1,230)  (98)
Fair value at end of period$ 161,445$ 158,367
[1] Represents the change due to collection / realization of expected cash flow over time.

Residential mortgage loans serviced for others were $17.1 billion at September 30, 2013 (December 31, 2012 - $16.7 billion).

Net mortgage servicing fees, a component of mortgage banking activities in the consolidated statements of operations, include the changes from period to period in the fair value of the MSRs, including changes due to collection / realization of expected cash flows. Mortgage servicing fees, excluding fair value adjustments, for the quarter and nine months ended September 30, 2013 amounted to $11.5 million and $34.1 million, respectively (September 30, 2012 - $12.2 million and $36.3 million, respectively). The banking subsidiaries receive servicing fees based on a percentage of the outstanding loan balance. At September 30, 2013, those weighted average mortgage servicing fees were 0.27% (September 30, 2012 – 0.28%). Under these servicing agreements, the banking subsidiaries do not generally earn significant prepayment penalty fees on the underlying loans serviced.

The section below includes information on assumptions used in the valuation model of the MSRs, originated and purchased.

Key economic assumptions used in measuring the servicing rights derived from loans securitized or sold by the Corporation during the quarters and nine months ended September 30, 2013 and 2012 were as follows:

  Quarter endedNine months ended
 September 30, 2013September 30, 2012September 30, 2013September 30, 2012
Prepayment speed 5.6% 6.4% 7.0% 6.2%
Weighted average life17.7years 15.6years14.2years 16.2years
Discount rate (annual rate) 11.2% 11.3% 11.1% 11.4%

Key economic assumptions used to estimate the fair value of MSRs derived from sales and securitizations of mortgage loans performed by the banking subsidiaries and the sensitivity to immediate changes in those assumptions were as follows as of the end of the periods reported:

 Originated MSRs
        
(In thousands)September 30, 2013December 31, 2012
Fair value of servicing rights$ 115,057 $ 102,727 
Weighted average life 12.7years 10.2years
Weighted average prepayment speed (annual rate)  7.9%  9.8%
 Impact on fair value of 10% adverse change$ (3,218) $ (3,226) 
 Impact on fair value of 20% adverse change$ (6,868) $ (7,018) 
Weighted average discount rate (annual rate)  11.7%  12.3%
 Impact on fair value of 10% adverse change$ (4,473) $ (3,518) 
 Impact on fair value of 20% adverse change$ (9,166) $ (7,505) 

The banking subsidiaries also own servicing rights purchased from other financial institutions. The fair value of purchased MSRs, their related valuation assumptions and the sensitivity to immediate changes in those assumptions were as follows as of the end of the periods reported:

 Purchased MSRs
        
(In thousands)September 30, 2013December 31, 2012
Fair value of servicing rights$ 46,388 $ 51,703 
Weighted average life 10.8years 11.0years
Weighted average prepayment speed (annual rate)  9.2%  9.1%
 Impact on fair value of 10% adverse change$ (1,828) $ (2,350) 
 Impact on fair value of 20% adverse change$ (3,383) $ (4,024) 
Weighted average discount rate (annual rate)  10.8%  11.4%
 Impact on fair value of 10% adverse change$ (1,934) $ (2,516) 
 Impact on fair value of 20% adverse change$ (3,565) $ (4,317) 

The sensitivity analyses presented in the tables above for servicing rights are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 and 20 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in the sensitivity tables included herein, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities.

At September 30, 2013, the Corporation serviced $2.6 billion (December 31, 2012 - $2.9 billion) in residential mortgage loans with credit recourse to the Corporation.

Under the GNMA securitizations, the Corporation, as servicer, has the right to repurchase (but not the obligation), at its option and without GNMA's prior authorization, any loan that is collateral for a GNMA guaranteed mortgage-backed security when certain delinquency criteria are met. At the time that individual loans meet GNMA's specified delinquency criteria and are eligible for repurchase, the Corporation is deemed to have regained effective control over these loans if the Corporation was the pool issuer. At September 30, 2013, the Corporation had recorded $51 million in mortgage loans on its consolidated statements of financial condition related to this buy-back option program (December 31, 2012 - $56 million). As long as the Corporation continues to service the loans that continue to be collateral in a GNMA guaranteed mortgage-backed security, the MSR is recognized by the Corporation. During the nine months ended September 30, 2013, the Corporation repurchased approximately $ 155 million (December 31, 2012 - $255 million) of mortgage loans under the GNMA buy-back option program. The determination to repurchase these loans was based on the economic benefits of the transaction, which results in a reduction of the servicing costs for these severely delinquent loans, mostly related to principal and interest advances. Furthermore, due to their guaranteed nature, the risk associated with the loans is minimal. The Corporation places these loans under its loss mitigation programs and once brought back to current status, these may be either retained in portfolio or re-sold in the secondary market.