Loans Held for Sale, Loan Servicing and Mortgage Origination

12 Months Ended

Dec. 31, 2012

Mortgage Loans on Real Estate, by Loan Disclosure [Text Block]

NOTE 5. Loans Held for Sale, Loan Servicing and Mortgage Origination

The portfolio of residential mortgages serviced for others was $1.9 billion at December 31, 2012, and $1.4 billion at both December 31 and September 30, 2011. The amount of contractually specified servicing fees earned by First Federal during 2012 was $4.3 million, compared with $933 thousand for the quarter ended December 31, 2011, and $3.5 million and $3.2 million for the years ended September 30, 2011 and 2010, respectively. Servicing fees are recorded in mortgage and other loan income in the Consolidated Statements of Operations.

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. 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.

	Year Ended December 31,			Quarter Ended December 31,			Years Ended September 30,
(in thousands)	2012			2011			2011			2010
Decrease in Fair Value of MSRs	$	(4,725	)	$	(1,251	)	$	(3,610	)	$	(4,266	)
Gains Related to Derivatives		1,472			624			2,895			5,018
Net effect on Statements of Operations	$	(3,253	)	$	(627	)	$	(715	)	$	752

The following table is an analysis of the activity in the MSRs.

	As of and for
	Year Ended			Quarter Ended			Year Ended
	December 31,			December 31,			September 30,
(in thousands)	2012			2011			2011
Carrying value at beginning of period	$	10,663		$	10,572		$	10,200
Additions
Servicing assets that resulted from transfers of financial assets		7,972			1,342			3,982
Decrease in fair value
Due to change in valuation inputs or assumptions		(2,386	)		(750	)		(1,974	)
Due to increases in principal paydowns or runoff		(2,339	)		(501	)		(1,636	)
Carrying value at end of period	$	13,910		$	10,663		$	10,572

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.

The characteristics and sensitivity analysis of the MSR are included in the following table as of December 31, 2012.

(dollars in thousands)	Residential Mortgage Servicing Rights
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		4.75 years
Constant prepayment rate (CPR)		16.8	%
Weighted average discount rate		10.4
Effect on fair value due to change in interest rates
25 basis point increase	$	1,010
50 basis point increase		2,009
25 basis point decrease		(1,014	)
50 basis point decrease		(1,470	)

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 during the respective periods.

	Year Ended December 31,		Quarter Ended December 31,		Years Ended September 30,
(in thousands)	2012		2011		2011		2010
Loan securitization with Fannie Mae	$	561,724	$	96,918	$	254,770	$	196,280
Loan sales to Fannie Mae		168,103		7,360		44,477		30,517
Loan sales to FHLB		20,468		2,635		12,930		13,515
Loan sales or securitizations to other investors		13,865		3,050		8,458		17,234
Total loan securitizations and loan sales	$	764,160	$	109,963	$	320,635	$	257,546

Loans held for sale have historically been comprised of residential mortgage loans awaiting sale in the secondary market, which generally settle in 15 to 45 days. Loans held for sale, which consists of residential mortgage loans to be sold in the secondary market, was $55.2 million at December 31, 2012, compared with $48.3 million and $94.9 million at December 31, 2011 and September 30, 2011, respectively. Loans held for sale at September 30, 2011 was comprised of $40.8 million in residential mortgage loans awaiting sale in the secondary market and $54.1 million of loans in the bulk loan sale pool.