Transfers of financial assets and mortgage servicing assets

3 Months Ended

Mar. 31, 2014

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 21to the consolidated financial statements for a description of such arrangements.

No liabilities were incurred as a result of these securitizations during the quarters ended March 31,2014 and 2013 because they did not contain any credit recourse arrangements. During the quarter ended March 31,2014 the Corporation recorded a net gain of $7.8million (March 31,2013 - $17.7 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 securitizedduring the quarters ended March 31,2014 and 2013.

		Proceeds Obtained During the Quarter Ended March 31, 2014
(In thousands)	Level 1		Level 2		Level 3		Initial Fair Value
Assets
Trading account securities:
Mortgage-backed securities - GNMA	$	-	$	165,932	$	-	$	165,932
Mortgage-backed securities - FNMA		-		62,583		-		62,583
Total trading account securities	$	-	$	228,515	$	-	$	228,515
Mortgage servicing rights		-		-		3,198		3,198
Total	$	-	$	228,515	$	3,198	$	231,713

		Proceeds Obtained During the Quarter Ended March 31, 2013
(In thousands)	Level 1		Level 2		Level 3		Initial Fair Value
Assets
Trading account securities:
Mortgage-backed securities - GNMA	$	-	$	285,252	$	-	$	285,252
Mortgage-backed securities - FNMA		-		128,142		-		128,142
Total trading account securities	$	-	$	413,394	$	-	$	413,394
Mortgage servicing rights		-		-		4,743		4,743
Total	$	-	$	413,394	$	4,743	$	418,137

During the quarter ended March 31,2014, the Corporation retained servicing rights on whole loan sales involving approximately $32 million in principal balance outstanding (March 31,2013- $36 million), with realized gains of approximately $1.1 million (March 31,2013 - gains of $1.5 million). All loan sales performed during the quarters ended March 31,2014 and 2013 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.

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 quarters ended March 31, 2014 and 2013.

Residential MSRs
(In thousands)	March 31, 2014		March 31, 2013
Fair value at beginning of period	$	161,099	$	154,430
Purchases		-		45
Servicing from securitizations or asset transfers		3,528		5,102
Changes due to payments on loans[1]		(4,151)		(6,064)
Reduction due to loan repurchases		(922)		(995)
Changes in fair value due to changes in valuation model inputs or assumptions		(3,023)		1,444
Other disposals		(2)		(13)
Fair value at end of period	$	156,529	$	153,949
[1] Represents changes due to collection / realization of expected cash flows over time.

Residential mortgage loans serviced for others were $16.2billion at March 31,2014 (December 31, 2013 - $16.3billion).

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 ended March 31,2014amounted to $10.8 million (March 31,2013- $11.2million). The banking subsidiaries receive servicing fees based on a percentage of the outstanding loan balance. At March 31,2014, those weighted average mortgage servicing fees were 0.26% (March 31,2013 –0.27%). 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 ended March 31, 2014 and 2013 were as follows:

	Quarter ended
	March 31, 2014		March 31, 2013
Prepayment speed	6.2	%	8.2	%
Weighted average life	16.1	years	12.2	years
Discount rate (annual rate)	10.7	%	11.1	%

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 assumptionswere as follows as of the end of the periods reported:

	Originated MSRs
(In thousands)		March 31, 2014			December 31, 2013
Fair value of servicing rights		$	113,563		$	115,753
Weighted average life			12.5	years		12.5	years
Weighted average prepayment speed (annual rate)			8.0	%		8.0	%
	Impact on fair value of 10% adverse change	$	(4,550)		$	(3,763)
	Impact on fair value of 20% adverse change	$	(8,166)		$	(7,459)
Weighted average discount rate (annual rate)			11.6	%		11.6	%
	Impact on fair value of 10% adverse change	$	(5,602)		$	(4,930)
	Impact on fair value of 20% adverse change	$	(10,091)		$	(9,595)

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)		March 31, 2014			December 31, 2013
Fair value of servicing rights		$	42,966		$	45,346
Weighted average life			11.0	years		10.9	years
Weighted average prepayment speed (annual rate)			9.1	%		9.2	%
	Impact on fair value of 10% adverse change	$	(1,783)		$	(1,969)
	Impact on fair value of 20% adverse change	$	(3,210)		$	(3,478)
Weighted average discount rate (annual rate)			10.9	%		10.8	%
	Impact on fair value of 10% adverse change	$	(1,865)		$	(2,073)
	Impact on fair value of 20% adverse change	$	(3,346)		$	(3,655)

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 March 31,2014, the Corporation serviced $2.4billion (December 31, 2013 - $2.5billion) 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 March 31,2014, the Corporation had recorded $38million in mortgage loans on its consolidated statements of financial condition related to this buy-back option program (December 31, 2013 - $48million).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 quarterended March 31, 2014, the Corporation repurchased approximately $ 49million (year ended December 31, 2013 - $209million) 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.