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Loan Servicing and Mortgage Origination
 12 Months Ended
Sep. 30, 2011
Loan Servicing [Text Block]

NOTE 5. Loan Servicing and Mortgage Origination


     The portfolio of residential mortgages serviced for others was $1.4 billion at September 30, 2011 and $1.3 billion at September 30, 2010. The amount of contractually specified servicing fees earned by First Federal during fiscal 2011 was $3.5 million, compared with $3.2 million and $2.8 million for fiscal 2010 and fiscal 2009, respectively. Servicing fees are recorded in mortgage and other loan income in the Consolidated Statements of Operations.


     Residential mortgage servicing rights are recorded on the Consolidated Balance Sheets at fair value with changes in fair value recorded as a component of mortgage and other loan income in the Consolidated Statements of Operations for each period. First Federal uses various free standing derivative instruments to mitigate the income statement effect of changes in fair value due to changes in valuation inputs and residential mortgage servicing rights assumptions. The following table presents the changes in the fair value of MSRs and its offsetting hedge.


 

 

 

 

 

 

 

 

 

 

 

               

(dollars in thousands)

 

 

 

 

 

 

 

For the Year Ended,
September 30,

 

Decrease in Fair
Value of MSRs

 

Gains Related
to Derivatives

 

Net effect on
Statements of
Operations

 

               

2011

 

$

(3,610

)

$

2,895

 

$

(715

)

2010

 

 

(4,266

)

 

5,018

 

 

752

 

2009

 

 

(6,871

)

 

3,655

 

 

(3,216

)

 

 

 

 

 

 

 

 

 

 

 

                     

     The following table is an analysis of the activity in the residential mortgage servicing rights for the years ended September 30, 2011, and 2010.


 

 

 

 

 

 

 

 

               

 

 

 

As of September 30,

 

 

 

   

(in thousands)

 

2011

 

2010

 

           

Carrying value at beginning of period

 

$

10,200

 

$

11,166

 

Additions

 

 

 

 

 

 

 

Servicing assets that resulted from transfers of financial assets

 

 

3,982

 

 

3,300

 

 

 

 

 

 

 

 

 

Decrease in fair value:

 

 

 

 

 

 

 

Due to change in valuation inputs or assumptions

 

 

(1,974

)

 

(2,986

)

Due to increases in principal paydowns or runoff

 

 

(1,636

)

 

(1,280

)

 

 

   
     

Carrying value at end of period

 

$

10,572

 

$

10,200

 

 

 

   
     

 

 

 

 

 

 

 

 

               

     The fair value of MSRs is highly sensitive to changes in assumptions and fair value is determined by estimating the present value of the asset’s future cash flows utilizing market-based prepayment rates, discount rates, and other assumptions validated through comparison to trade information, industry surveys, and with the use of independent third party appraisals. Changes in prepayment speed assumptions have the most significant impact on the fair value of MSRs. Generally, as interest rates decline, mortgage loan prepayments accelerate due to increased refinance activity, which results in a decrease in the fair value of the MSR. Measurement of fair value is limited to the conditions existing and the assumptions utilized as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different time.


     At September 30, 2011, the characteristics, and sensitivity analysis of the MSR are included in the following table.


 

 

 

 

 

         

 

(dollars in thousands)

 

Residential
Mortgage Servicing Rights
September 30, 2011

 

 

       

Composition of residential loans serviced for others

 

 

 

 

Fixed-rate mortgage loans

 

 

99.1

%

Adjustable-rate mortgage loans

 

 

0.9

 

 

 

     

Total

 

 

100.0

%

 

 

     

 

 

 

 

 

Weighted average life

 

 

4.22 years

 

Constant prepayment rate (CPR)

 

 

20.2

%

Weighted average discount rate

 

 

10.8

 

Effect on fair value of a 25 basis point increase in interest rates

 

$

653

 

Effect on fair value of a 50 basis point increase in interest rates

 

 

1,374

 

Effect on fair value of a 25 basis point decrease in interest rates

 

 

(659

)

Effect on fair value of a 50 basis point decrease in interest rates

 

 

(982

)

 

 

 

 

 

         

     The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the changes in assumptions to fair value may not be linear. Also, in this table, the effects of an adverse variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumptions, while in reality, changes in one factor may result in changing another, which may magnify or contract the effect of the change.


     The following table displays mortgage loan securitizations and whole loan sales.


 

 

 

 

 

 

 

 

 

 

 

                     

 

 

 

Years Ended September 30,

 

 

 

   

(in thousands)

 

2011

 

2010

 

2009

 

               

Loan securitization with Fannie Mae

 

$

254,770

 

$

196,280

 

$

337,908

 

Loan sales to Fannie Mae

 

 

44,477

 

 

30,517

 

 

77,875

 

Loan sales to FHLB

 

 

12,930

 

 

13,515

 

 

12,245

 

Loan sales to other investors

 

 

8,458

 

 

17,234

 

 

10,825

 

 

 

                 

Total loan securitizations and loan sales

 

$

320,635

 

$

257,546

 

$

438,853